Foreclosure Nation

Mortgaging the American Dream

Shari B. Olefson, JD, LLM

Modifications,Short Sales,Deeds in Lieu,WriteDowns

Report: Mods Often More Beneficial Than Foreclosures for Investors

Posted on Monday, April 4, 2011

A push for servicers to implement principal write-downs and provide screening for as many modification options as possible before proceeding to foreclosure has been met with stiff resistance from servicers and some lawmakers.Meanwhile, the number of loan modifications pales in comparison to the number of foreclosures. Foreclosure prevention programs have found themselves on the chopping block due to low and poor performance, and servicers have said the risk of borrowers who receive modifications falling behind again is pretty high. But new data suggests that modifications and even write-downs in certain cases might actually be more beneficial to investors as well as struggling borrowers. A report released recently by the Center for Responsible Lending (CRL) says even when taking into account borrowers who re-default and the fact that lower principal balances result in less money for investors, loan modifications are often more profitable to investors than foreclosures are. And according to Dallas, Texas-based lawyer Talcott Franklin, investors are beginning to push for modifications over foreclosures.Franklin talked with the St. Petersburg Times and said investors and servicers are having trouble reaching agreements.“If modification makes sense, all investors I’ve talked to say, ‘Do it.’ The banks and the servicers want to promote this myth that investors don’t want modifications,” he said. “But that’s not accurate in terms of the investors I’ve talked to.”The report talks about the net present value (NPV) calculations that servicers use to determine whether a modification or foreclosure would ultimately be more beneficial to investors. Servicers are supposed to make their decisions on modification and foreclosure according to the NPV. In a simulation study by the CRL, results showed that NPV ranks modifications as more profitable for investors. “When we compare our results with actual market conditions, we find that the NPV test should favor a much higher proportion of payment-reducing modifications than are currently occurring,” the report said. Based on the results of its study, the CRL says that it is clear the low levels of modifications are not due to servicers using the NPV to determine what actions are in the best interest of investors.“Potential reasons for this failure could be the lack of capacity in mortgage servicing companies, misalignment of incentives due to the servicer compensation structure, lack of investor involvement, borrower confusion, and/or poorly designed program eligibility criteria,”the report said.By: Joy Leopold, DS NEWS